The ‘Insolvency and Bankruptcy Code of India, 2016’ (hereinafter referred to as “IBC”) had been passed by both Houses of Parliament in August 2016, in order to provide for an efficient, transparent and a time bound manner for resolving the insolvency and bankruptcy process. One of the key objectives of IBC is reflected in the provisions which focuses on providing the ‘Corporate Debtor’ with a ‘resolution plan’.
A ‘resolution applicant’ as defined under the code meant, “any person who submits a resolution plan to the resolution professional”. Before the introduction of Section 29A, that there was no specific criteria or parameters to be an eligible resolution applicant. This lacunae in the law served as a loophole and paved a way for the defaulters to gain a back-door entry to the management of the corporate debtor. It provided an opportunity for a default promoter to submit a resolution plan and deprive the corporate debtor of his rights by acquiring the assets at a discounted price. This loophole was highly criticized paving the way towards the introduction of Section 29A.
That being said, Section 29A was introduced with the intent of prohibiting those persons who have acted as a contributor to the defaults of the company, from gaining control over the assets of corporate debtor, by declaring them ineligible to present a resolution plan to the resolution professional.
SECTION 29A OF INSOLVENCY AND BANKRUPTCY CODE, 2016
Section 29A was introduced as preventive measure. It was first added by the ‘Ordinance of 2017’, which was replaced by the ‘Insolvency and Bankruptcy Code (Amendment) Bill 2017 (IBC 2017)’, which made the provision effective. Thereafter, the ‘Insolvency and Bankruptcy code (Second Amendment) Bill 2018’ modified the extent and application of Section 29A. The major changes were:
- The definition of the term ‘Related Party’ and the inclusion of relative of the spouse under the category of ‘Connected Person’, widened the ambit of section 29Aby reducing the exemptions which could have been used by the resolution applicant to escape ineligibility.
- Financial Entities were excluded.
- Micro, Small and Medium sector Enterprises (MSMEs)were provided limited exemptions, such as, the promoters were allowed to submit the resolution plan only when they are not declared as wilful defaulter subject to the rights of third parties interest.
RETROSPECTIVE IMPACT OF SECTION 29A
The Amendment Act, 2018 has clearly stated that the Section 29A of the code was applicable from 23rd November, 2018. However, the question that arose was, whether the pending cases before this date could not be governed by this particular section 29A?
In the case of Nand Kishore Marwah v. Samundru Devi, it was clearly laid out that, the rights of the parties are determined on the basis of the rights available to them on the date of suit. Further, in the case of N. Sri Padmanabha Nadar v. P. Ramalinga Nadar, it was held that, subsequent legislation cannot be made applicable to the pending proceeding. Further, there is no presumption against retrospective operation of a statute unless the Act relates to procedure. Even a procedural provision cannot, in the absence of clear contrary intendment expressed therein, be given a greater retrospectivity than is expressly mentioned.
It is, thus, clear that since the Ordinance (and subsequent Amendment Act, 2018) was operative only from 23.11.2018, the pending cases before that date will be governed without taking into account the newly introduced section 29A. Concluded cases cannot be reopened on the basis of a later enactment made applicable prospectively.
IMPACT OF SECTION 29A ON SECTION 52 OF IBC
In the case of State Bank of India v Anuj Bajpai, it was held that, the disqualified persons under Section 29A, are completely and irrevocably barred from having access to the assets of the Corporate Debtor. Now, a secured creditor is the person who has provided credit in favour of the debtor and further, has secured such aid given to the corporate debtor by imbibing a right, title or interest on any of the asset of the corporate debtor. As per Section 52, the creditor shall always have an option of falling back on the secured asset and realise the amount due from the debtor by selling off that particular asset.
It is pertinent to note that, if a secured creditor realises its security interest, such creditor may easily sell the asset back to the promoter himself who is ineligible under section 29A of the Code, which may, in essence kill the whole motive of Section 29A of the Code. Therefore, the essence and applicability of Section 29A has been made in the case of Section 52 of the Code. That being said, the persons disqualified under section 29A shall remain to be prohibited even when the secured creditor has realised his security interest and is planning to sell his/her asset under Section 52of the Code.
IMPACT OF SECTION 29A ON SECTION 230 OF COMPANIES ACT, 2013
In the case of Jindal Steel & Power Ltd v. Arun Kumar Jagatramka, it was held that that, even during the period of Liquidation, for the purpose of Section 230 of the Companies Act, 2013 the ‘Corporate Debtor’ is to be saved from its own management. This means that, those who are ineligible under Section 29A, are not entitled to file application for Compromise and Arrangement in their favour under Section 230 of the Companies Act.
The Hon’ble apex court warranted a purposive interpretation to Section 29A and thus applied the same to the scheme of arrangements and compromises. However, the bar by Section 29A can be lifted through the “exception clause”. But this exception clause should be applicable only in cases, where no Resolution Plans have been received from eligible persons, thereby ensuring that the Resolution Applicants do not abuse such exception clause. In other words, this exception clause is only a last resort before moving into liquidation. The purpose behind such an exception clause is to ensure the company’s survival and continuation.
That being said, in the presence of such an exception clause, the ineligible persons will also be capable of submitting a scheme of arrangements and compromises and will be allowed for corporate restructuring or sale of Corporate Debt’s assets.
IMPACT OF SECTION 29A ON PROMOTORS
Section 29A has excessively enlarged the scope of disqualification on the basis of generalized criteria. In accordance with Section 29A, the promoter can be debarred from the submission of a resolution plan, under the following condition:
- A company takes a loan and then fails to repay it.
- Promoters gives a personal guarantee to creditors for loans.
That being said, Section 29A does not have any consideration in regards to genuine financial or economic distress. Furthermore, in the case of RBL Bank Ltd. v. MBL Infrastructure Ltd., it was held that, the intention of the legislature is no to disqualify the promoters as a class but to rather exclude that class of persons who may affect the credibility of the resolution process given their antecedents. However, in practice, Section 29A fails to differentiate between a genuine applicant and one with antecedents, thereby impacting the genuine promotors, by making them ineligible in accordance with the provision.
IMPACT OF SECTION 29A ON NOMINEE DIRECTORS
In accordance with Section 166 of the Companies Act, 2013, a ‘Nominee Director’ is defined as, an individuals nominated by the investee companies, and acting as a non-executive director on the BOD, thereby taking part directly or indirectly in the management of the company. Now, Section 29A(c) defines ‘Connected Person’ as, any person who is anyway “related”or is in “control” of the management of the company. Hence, every director, being the part of the management will have to qualify the test of Section 29A(c) in order to qualify as eligible resolution applicant. That being said, Nominee Director being a part of the management of the company, does not qualify the test laid down in the said provision, hence making him ineligible resolution applicant.
The matter came up for the first time in Dorairaj Thillairaj v. Ashok Magnetic Ltd., whereby the nominee directors submitted a resolution plan against the corporate debtor, which was rejected by the Committee of Creditors (CoC), and subsequently rejected by the NCLT Chennai Bench as well. However, on appeal, the NCLAT did not decide on the ineligibility of nominee directors, but rather the claim was rejected on the merits of the decision of the CoC. Therefore, the question of eligibility of nominee directors as resolution applicant still remains unanswered.
CRITICAL ANALYSIS
The insertion of Section 29A has cured some lacunas in the law in the code, but along with it made Insolvency and Bankruptcy procedure a bit more rigmarole, since the liquidator had been assigned with an extra duty of identifying the eligible resolution applicant within a time restraint of 180 days to complete the insolvency process. The term ‘person acting jointly or in concert’ has not been defined in the Code and using the definition provided in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 results in inclusion of an extremely wide gamut of persons within the scope of section 29A. In practice, it is unclear whether the term ‘connected person’ in clause (j) applies to only the resolution applicant or even ‘persons acting jointly or in concert with such person’. If the latter interpretation is taken, this would be applicable to multiple layers of persons, who are related to the resolution applicant even remotely.
Section 29A was introduced to disqualify only those, who had contributed in the downfall of the corporate debtor or were unsuitable to run the company because of their antecedents whether directly or indirectly. Therefore, extending the disqualification to a resolution application owning to infirmities in persons remotely related may have adverse consequences.
A pertinent question arising here is whether lookback should be allowed while ascertaining ineligibility. Since the language of section merely suggests that the present status of applicant is the only time, which should be taken into consideration. As there is no look back period is provided in the statute.
CONCLUSION AND SUGGESTION
The inclusive nature of the code suggests that, it was designed to provide an apt way to cure an ailing entity. However, the scope of section 29A is contrary to the said intent of the legislation. The multi-layered ineligibility provided under section 29A may lead to exactly incompatible outcome. The recursive definition of the important terms like related parties, connected persons etc. are wide enough to defeat the inclusive nature of the enactment. Thus, it can be undoubtedly said that the provision excludes the bona fide resolution applicant. Therefore, the judiciary must provide certain amount of leniency to maximize the objective of the code.
English law provides a useful template wherein connected parties interested in purchasing assets of an insolvent company has an option to approach the Pre-Pack Pool and disclose details of the deal. A similar concept can be introduced in India where a promoter who is interested to buy back his business during insolvency resolution can place his resolution plan before Committee of Independent experts.
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